Yahoo Finance What Men Can Learn From Female Investors
A couple walks into a financial advisor's office. The man says, "Here's what I'm thinking of doing with our money." The woman says, "I read about this investment and find it interesting. What do you think?"
Don't worry, that's not the beginning of a bad "walks into a bar" joke. It's the type of conversation, however, that shows the classic difference in how men and women approach money and investing, says financial planner Sheryl Garrett, founder of The Garrett Planning Network.
Men tend to be confident, while women are usually cautious.
"If you ask a couple who have all the money in the world, 'Are you financially secure,' the man might say, 'Yes,'" Garrett says. "And the woman will say, 'Maybe.'"
That difference in attitude isn't just anecdotal. In BlackRock's latest 2014 Investor Pulse survey, 55 percent of men described themselves "in control" of their financial future, compared with just 38 percent of women. Similarly, 54 percent of men said they are confident that they are making the right savings and investment decisions, versus 34 percent of women.
Yet, there's no shortage of research showing women are better investors than men in many regards. In fact, the typical female investor outperformed the typical male investor by 12 percent in 2014, according to data from SigFig, an investment management firm whose portfolio tracker enables investors to monitor their brokerage accounts and performance.
To put this in perspective, if you gave a typical female investor and a typical male investor $100,000 each to invest last year, and this performance trend continued for 30 years, without adding a single penny to that initial investment, the woman would earn $58,000 more over that time period. This was calculated based on an annual return of 4.7 percent for female and 4.1 percent for male investors.
Are women simply not giving themselves enough credit when it comes to their ability to manage their money? Or does their relative lack of confidence compared to their male counterparts actually breed habits that make them better investors?
Perhaps, it's a little bit of both.
"Women are less likely to make quick decisions when it comes to major financial matters," Garrett says. "And you could say, 'Is that lack of confidence?' Yeah, partly. But it's also a healthy activity to be a little more patient and explore the decisions before jumping in headfirst."
Men, on the other hand, are more likely to do just that. "Men frequently have misplaced confidence," Garrett says. "They might have a recent success or a series of recent successes and misplace that success as skill. And women are more likely to go, 'We were lucky.'"
Perhaps it's not a coincidence, then, that men trade more frequently than women, according to SigFig's data. In 2014, male investors' portfolios had 50 percent more turnover than women's portfolios. This is one possible reason why male investors had lower returns last year: Frequent traders incur transaction costs and possibly make rash investing decisions at just the wrong time in the market cycle.
In fact, investors (both male and female) who had 100 percent or greater portfolio turnover in 2014, meaning they placed both buy-and-sell trades totaling more than 100 percent of the average value of the account during the year, had median net-returns of just 0.1 percent in 2014, compared with 4.7 percent for everybody else, according to SigFig.
"Over time, women have seemed to be less prone to making big moves in asset allocation," says Terry Banet, chief investment officer at SigFig. "They are more reasoned in their approach going in and then don't monkey with it quite as much."
It's one thing to be reasoned or more conservative with your investments, though, and another to let that risk aversion paralyze you.
"Oftentimes, you see women who are so risk-sensitive that they are less likely to take the risk that is a necessary component of return," says Heather Polanto, personal investor strategist at BlackRock.
The reasons for why women tend to be risk-averse are not entirely clear and there may be many factors at play, but Polanto has one theory. She says it may have a lot to do with the fact that most women take a caregiving role within their families. A June 2011 MetLife study on caregiving shows only 34 percent of men take on caregiving roles compared to 66 percent of women.
The difference is especially pronounced in how married couples view their financial future. Women, especially those who choose to exit the workforce, manage the family's day-to-day business by shopping and paying the bills and credit cards. For these reasons, women often have to focus on financial stability and quality of family life, Polanto says. Men, on the other hand, have the additional freedom to focus on the big picture.
What does that all mean for everyday investors? If you are married or otherwise financially attached to a significant other, talk about money early and talk often, says Polanto. "Those are the couples that tend to be the most surefooted financially."
No matter your gender, try to avoid falling into either extreme. If you're too focused on the keeping finances stable day-to-day, make the big picture a part of it, Polanto advises. That could be achieved by setting up automatic deposits into an individual retirement account or making sure you are maximizing your 401(k) contributions.
And if you're cocky, remember confidence does not necessarily result in better investment performance. "I think that in our society being confident is a positive word and not having confidence is a negative thing," Garrett says. "But it shouldn't be. We stereotype women as being weak by saying they're not confident, but rather they're being strong enough to say, 'I don't have enough information to say I feel confident about making a decision.'"
To put it another way: If overconfidence causes investors to make rash, and not necessarily good, decisions, being less confident, as many female investors appear to be compared with their male counterparts, appears to be a step in the right direction.
Aleksandra Todorova is the editorial director at SigFig , a portfolio tracking and management company in San Francisco, California. Nearly a million people use SigFig to track, improve and manage over $350 billion in investments.
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